A Considered Guide to Strategically Buying a Business
A Considered Guide to Strategically Buying a Business
The concept of strategically buying or selling a business is certainly an important approach to adopt. However, the degree of your understanding of what you are trying to achieve by employing this peculiar transaction will definitely affect the outcome with special reference to the selling price that is achieved.
Warren Buffett supports this by saying, “Never invest in a business you don’t understand”.
I am using the term, strategic buyer, in the knowledge that you as the buyer are an operating company and you are seeking to acquire certain specific interactive objectives with another company. (Some describe this objective as synergies).
As the buyer, you will likely be operating in the same or an adjacent market and can even be a direct competitor to that business. Your transaction, therefore, is different as you are not an unrelated financial buyer. You are seeking very specific needs that are directly related to your business and will actually be a direct leverage benefit to your business.
Initially, you will note many similarities in a straight financial purchase of a business. The difference in a strategic purchase is that you as the buyer are wanting to fast-track your business endeavours by buying in certain achievements and adding them immediately to your business.
There are many reasons that will motivate you as a strategic buyer. For example, as a business broker, a buyer looked at one of my listings purely on the need to acquire the time-tested and pruned systems of the business to save himself the pain, time and cost of building a suitable alternative in his own business, particularly post-pandemic.
As a buyer, you should actively look at the following reasons for your strategic purchase.
1. Market Share.
This is very relevant to you as you are purchasing a larger slice of the market than the one that you are already operating in. This is shown in accounting firms, as they struggle to get new clients due to the cyclic nature of clients in this arena. A database of loyal clients can project you into a new level and will save time that may translate into years of frustration saved. Also, the clients will have a demonstratable positive record as the weaker client would have already been culled or identified with suitable strategies to deal with them.
A larger share of the market will have other benefits in terms of your profitability and your branding credibility.
Often an expansion into the market with a strategic purchase will provide other opportunities to expand your market penetration. The business that you are purchasing may have access to certain products that you previously did not due to the existence of product purchase agreements or you being locked into a less preferred product line.
Another possibility is that the business being sold may have large stock holdings of products that you might need due to supply disruption.
2. Intellectual Capabilities.
The business might have systems or processes that are protected by the company or patents and are not accessible to competitors. This search for a way to improve your business’s competencies can also include the annexing of their personnel to supplement your workforce as they have certain unique skill sets that are in short supply.
The idea here is that due to increased market share, a better employed and shared workforce, increased buying power and other benefits there will be a vastly improved income potential. A strategic buyer will initially look at the business as a stand-alone business for the purposes of due diligence and then look at possible cost savings by pulling the resources into your business. The rule of thumb is that the new business after the absorption will be greater than the sum of the business as individual entities.
The new entity will have a better valuation as a business and therefore, be in a better position to borrow capital and will be stronger on the business cash flow reality.
Savings can be substantial in the purchase as there will be a reduction in duplicated expenses should the businesses be run separately. Further savings could include software licences, ATO filing fees, insurance expenses and membership dues.
Another area of savings that are not immediately included, is research and development.
Each area discussed above will have a specific meaning for you as the buyer. The level of synergy and the weighting that you apply to each of the categories will be according to your business, your own vision for your business and what areas you want to grow or counteract.
As a conclusion, I hasten to caution you to be wary of untested and unfounded assumptions about the business that you are strategically buying. A good beginning is to ask the question: How is this business fulfilling the needs of its customers? The process of finding answers may help you in understanding your own business as well as the purchase.
A further assumption is that of the culture of the business.
- Can that business be effectively absorbed into your business?
- Will the purchased business clients tolerate your business culture?
- What strategies will you employ to achieve an acculturalisation between the two businesses as they merge?
Part of this cultural awareness is the need to build new management out of the old. How will you achieve that? What strategies will you utilise?
Remember, as a strategic buyer, you are wanting to create a long-term value from the acquisition. You are effectively blocking or controlling any competition as you have increased your market share and have not had to suffer the rigours of individual market growth. You will have the advantage in the transaction over an investor purchase as you will understand the implications of the other business.
I have not discussed the possibility that you will pay a premium price for the purchase. Although this may be true, your first priority is to analyse your business’s weaknesses and strengths. Then consider the benefits of the acquisition relative to your business. The price will emerge from that process and you will see value your own value in the acquisition.
I believe, Dan Kennedy’s adage, “Don’t forget, whoever can spend the most money to acquire a customer wins”, applies here.
A properly, executed strategic purchase will pay dividends in a multitude of ways. It can position your business into a dominance and it will accelerate your wealth accumulation.
About the author
As a previous multiple business owner in South Africa, Canada and Australia, Ray has an exceptionally high level of expertise when it comes to knowing ...